Suppose you hold $50 to buy groceries weekly and then the price of groceries increases by 5 percent.To be able to buy the same amount of groceries,what must happen to your nominal money holdings?

Question

Quizplus · Accepted Answer

A 5% increase in the price of groceries means that you need to spend 5% more to buy the same amount. Therefore, you need to have 5% more nominal money holdings to maintain the same purchasing power. 5% of $50 is $2.50, so your nominal money holdings must increase by $2.50.

Suppose You Hold $50 to Buy Groceries Weekly and Then